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Financial Happenings Blog
Friday, June 29 2007

An article in today's Australian runs with comments from MLC boss Steve Tucker showing his support for fee-based financial advice rather than commission based advice.  The article also points out the contrary argument that is promoted by AMP, that commissions reduce the cost of accessing financial advice.


We are definitely in Mr Tucker's corner on this one.  We believe that commission based advisers have extra incentives to recommend particular investment products that may not be in the "best" interests of their clients.  Whereas up front fee advice is clear and transparent and allows the advisers to seek the very best advice for their clients.


In terms of costs, commissions are still a cost of investing, however they are "hidden" from view.  As Mr Tucker points out, up front fees can be stopped while continuing to invest in a product.  Commissions are based on the product and continue to be paid until the investor ceases investing in that product.


We can see some of the argument proposed by AMP that up front fees can be a disincentive for smaller investors to seek professional advice.  That is why we use a very reasonable asset based fee as our basis for charging up front fees to our clients.  To get more details on our approach take a look at our web page - Portfolio Plus Service - Fees Policy.



Final comment - if you are not sure whether the investment products you have been advised to use give commission payments back to your adviser we encourage you to check this out and seek professional advice as to whether you could be doing better.




Scott Keefer

Posted by: Scott Keefer AT 02:42 am   |  Permalink   |  Email
Thursday, June 28 2007

Jim Parker, the Regional Director of Dimensional Funds Advisors Australia, posts a regular commentary on the DFA website.  The latest edition highlights the success of an American waitress, Mary Sue Williams, in a stock picking competition run by CNBC.  She is in line to win the million dollar first prize ahead of 375,000 contestants.  She has never bought or sold a real stock in her life.  The secret of her success: "Part of it was luck ... a lot of it was gut feeling, some eenie-meenie-minie-moe, and common sense."  Mary has beaten thousands of financial professionals who have the benefit of high quality university degrees and complex software.


This is more anecdotal evidence that successful stock picking is more about chance rather than experience or expertise.  This is part of the story behind the thinking that we use in building our investment portfolios, also based on academic research, that suggests you can not regularly beat the market and it is better to hold an index style approach to investing.  For more details on this philosophy take a look at our webpage - Building Portfolios.


For more details of Mary's story take a look at the BusinessWeek article.


Good on ya Mary.




Scott Keefer

Posted by: Scott Keefer AT 06:23 am   |  Permalink   |  Email
Wednesday, June 27 2007

In my previous career as a teacher, I was very happy to have access to an industry super fund.  The fees were low and performance on a par with commercial funds.  A recent report compiled by SuperRatings confirms my satisfaction with industry funds.  The report suggests that industry funds (on average) could provide $115,000 more in retirement dollars (measured in today's dollars) to members compared to retail master trusts.  (based on a 40 year working life)  This is not to be sneezed at.


We have clients who continue to use industry funds especially if this gives them access to low cost insurance products that they require.  However we think investors can do better with a more sophisticated approach that tailors a super fund to the exact needs of the client without hitting them with high fees.  However theories and strategies are just that unless they are backed up with actual results for the investors.  Following are the historical results to 31st May 2007 of our investment philosophy in action.  The results take into account fees and are based on a $50,000 portfolio.



1 Year

3 Years

5 Years

SuperRatings SR50 Balanced Index #




60% Growth Assets Portfolio




65% Growth Assets Portfolio




70% Growth Assets Portfolio




75% Growth Assets Portfolio





# SuperRatings' SR50 Balanced Index? is the median of the 50 largest balanced investment options with exposure to growth style assets of between 60% and 76%. Over 80% of Australians in our major super funds are invested in their fund's default investment option which in most cases is the balanced investment option.


These results suggest our approach is worth consideration.  Please check out our "Building Portfolios" webpage for more details.




Scott Keefer

Posted by: Scott Keefer AT 11:07 am   |  Permalink   |  Email
Monday, June 18 2007

About 3 years ago - mid 2004 - there was a brave forecast circulating in the media by economists BIS Shrapnel, which forecast interest reserve bank interest rates to hit 8%.  This would have made mortgage borrowing rates somewhere around 9.5%.  Pretty scary stuff. 

Here is the exact text from a Melbourne Age article dated the 14th of August 2004, from the article entitled 'Interest Rates - How High Will They Go':

'On the bear side is BIS Shrapnel, which is forecasting interest rates to peak by late 2006, with the Reserve Bank's cash rates hitting about 8 per cent. That's an extra 3 1/4 percentage points, or $550 a month, on a $225,000 home loan.'

Not suprisingly this report led to various doom and gloom forecasts for property prices - if interest rates were going to rise that far, then property prices would have to fall sharply.  (Or as a mate of mine says, property prices don't fall, they just consolidate).

Not long after this BIS changed their forecast, as mentioned by Australia's best financial commentator in this expert from the Sydney Morning Herald about 12 months later.

Alan Kohler, Sydney Morning Herald, 28 September 2005

The other item in the news this week was BIS Shrapnel's prediction of 6.5 per cent interest rates next year because of rising inflation. This firm had previously forecast interest rates of 9 per cent next year, so it was interesting that the media reporting of its latest report did not say: "BIS Shrapnel cuts rate forecast."

And now I see that BIS have jumped back onto the media forecasting wagon again, and are forecasting 22% growth in Brisbane property prices over the next three years - a much happier situation than previous forecasts would suggest.  The interest rates forecast to go with this is a 1/4 of a percent rise by September this year, and then interest rates on hold.

The bottom line is this.  Economic variables are tough to forecast - just look at BIS Shrapnel - in 2004 they tried to forecast 2 years ahead and missed by a lot, in 2005 they tried to forecast again and were out by half a percent.  Finally, having predicted in 2004 higher interest rates which would have had a negative impact on the property market, in 2007 they predict above average property growth in Brisbane.

Now, if you can just chop and change forecasts at a whim, I have an idea.  Why can't you have more than one forecast on the go at any one time?  So I am going to have a go at this forecasting game, and predict that over the next 12 months:

  • Australian Shares will be down by 5%
  • Australian Shares will return 0%
  • Australian Shares will return 5%
  • Australian Shares will return 10%
  • Australian Shares will return 15%
  • Australian Shares wil return 20%
  • Australian Shares will return 25%

It's a slightly different tact, but who else out there is guarateed of being able to point to the correct forecast in 12 months time!


Scott Francis

Posted by: Scott Francis AT 11:26 pm   |  Permalink   |  Email
Sunday, June 17 2007

With the rush to get money into superannuation this financial year, there is only two weeks until we move into the brave new world of a simpler superannuation system.

The basics of the new superannuation system will be that:

You can make 'tax effective' contributions to superannuation of up to $50,000 a year.  These contributions include your 9% compulsory employer contributions and any salary sacrifice contributions.

You can put in additional contributions of your own money (personal contributions) of up to $150,000 a year or $450,000, which will bring forward three years of contributions into one.

The investment earnings in a superannuation account will be taxed at a maximum of 15% - lower than investment earnings in a company structure, or for most people if the investments were held in their own name.

After the age of 60 you can withdraw superannuation tax free - either as a lump sum or as an ongoing income stream which has minimum withdrawals of 4% up to the age of 65 and 5% betweeen 65 and 75.  There is no maximum withdrawal.

Of course, this is just the rough outline.  Make sure you get further details about your situation before acting on anything.  However, this will be a simpler superannuation system, and is worth knowing about to get the maximum 'bang' for your buck.


Scott Francis


Posted by: Scott Francis AT 05:43 pm   |  Permalink   |  Email
Saturday, June 16 2007

I am currently visiting my wife's family in Jakarta, Indonesia.  Jakarta is a fascinating country with great diversity across all areas of society.  Even though the Australia government does not recommend visiting Indonesia due to security concerns, it is well worth a look and quite safe from my perspective.


Being in Jakarta has reminded me of the Emerging Markets phenomenon (Indonesia is generally accepted as one of these markets.)  The term is used to describe business and investment activity in industrialising or emerging regions of the world.  From an economics perspective, these economies are said to be in a transitional phase between developing and developed status.  They are countries that have begun to open up their economies to the world.  The classification of emerging markets is not an exact science and as such there is not a definitive list of countries included in this definition.  However, to put some names to these economies, the top 4 markets are generally referred to as the BRIC economies - Brazil, Russia, India and China.  If you have had any exposure to the international financial media you would quickly identify that these are some of the fastest growing economies in the world - 2006 growth results quoted by the International Monetary Fund saw all four with strong performances - Brazil (3.7%), Russia (6.7%), India (9.2%), China (10.7%).  (Indonesia saw 5.5% growth.)  Stock market returns reflected these conditions.  MSCI Indexes saw the following returns in local currency terms - Brazil (28.46%), Russia (52.11%), India (46.47%), and China (78.67%) all experiencing strong growth.  (Indonesia saw 55.02% growth.)


In comparison, returns in Australia (18.28%) and the US (13.18%) were more modest.


The same MSCI indexes place returns so far this year to 31st May: (in terms of the local currency)




1 Year

3 Years

5 Years


























Emerging Markets Index
















You would have to admit that the recent results are pretty impressive.


However, as with all major investment markets, to capture these returns there is a trade-off between risk and return.  The greater the risk, the greater the expected return.  Emerging Markets are no different and have experienced significant downturns.  Consider the Asian and South American monetary crisis in the late 1990s and early 2000s.  These economies also have some regulatory issues that need to be considered before investing, for instance the strict monetary and political controls in China and regulatory issues in Russia.


So what is our stance on investing in Emerging Markets?


We invest in Emerging Markets to provide an extra risk premium for our investors.  Investing in Emerging Markets also provides an extra level of diversification with our investment portfolios to smooth out volatility.  We invest in these markets by using an index style approach.  Not picking winners (or losers) but holding a wide spread of investments across emerging markets.  This keeps the cost of investing low.  Our preferred fund, Dimensional Emerging Markets Trust, holds shares in companies listed in Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey.  (You will note that it does not hold assets in China or Russia mainly due to the regulatory controls in place in those countries.)  In a standard portfolio, an investor would have an exposure of about 5.5% of their growth assets in emerging markets.


The Dimensional Emerging Markets Trust has had good performance to the 31st May 2007:

YTD - 12.71%, 1 Year Return - 33.81%, 3 Year Return - 30.32%, & 5 Year Return - 18.44%


I encourage you to have a closer look at investing in Emerging Markets.  To find out more about our investment philosophy please have a look at our web page on Building Portfolios.

Posted by: Scott Keefer AT 01:22 pm   |  Permalink   |  Email
Wednesday, June 13 2007

It is always good to get some positive feedback supporting your way of thinking.  Some good news came our way via the comments of David Murray, the chairman of the 50 billion dollar Future Fund.  He talked up the value of holding index style investments within his 50 billion dollar investment fund and adding to this some extra risk premium (he used the term alpha risk) to achieve strong long term results.


We employ index funds as the basis of all of our portfolios for clients.  They are cheap, effective and backed up by research suggesting active managers perform worse on average.  To this core we access extra risk premiums, and therefore returns, by investing in value and small companies through an index style approach.  (We also recommend investing in emerging markets in the international share arena.)  This is a similar, but not exactly the same, method as David Murray suggests the Future Fund will employ.


If the managers of 50 billion dollars with a long term perspective think this is the best approach - what about you?


For more details about our investment philosophy take a look at our webpage - Building Portfolios.




Scott Keefer

Posted by: Scott Keefer AT 09:54 am   |  Permalink   |  Email
Tuesday, June 12 2007

The last 7 years has been a dismal time for the returns from Global Shares (international shares).  Many investors that I am seeing are so frustrated that they are happy to call the 7 years a trend, and be done with these as investments althogether.

Which I think would be dangerous.

The poor performance in global shares has generally not been a sign that global investment markets have produces disasterous investment returns, rather that the Australian dollar has risen to 20 year highs at around 85 cents. 

Take for instance the Vanguard index funds.  These funds just hold all the investments that make up the global sharemarket index.  The interesting thing is Vanguard have both a currency hedged version, and a currency unhedged version.

The version that takes out currency movements has returned nearly 7% a year over the past 5 years (to the end of April 2007).  The version that exposes the portfolio to currency movements has returned -1.3% a year over the same period.  The difference of about 8% a year has been the strengthening in the Australian dollar.

So where to from here?  There seems no long term reason to think that global sharemarket returns will trail Australian sharemarket returns, so for the sake of diversification we carefully use global sharemarket returns in our portfolios.


Scott Francis

Posted by: Scott Francis AT 08:10 pm   |  Permalink   |  Email
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